Bear's Creditors Were the Ones Bailed Out

The quick read from the press is that the purchase of Bear Stearns (BSC) by JPMorgan Chase (JPM) was a "bailout."

Jim Hamilton over at EconBrowser doesn't buy that story. He says, "$2 a share is no bailout, but instead represents a fire sale price."

I buy that, because Bear had been selling for $57 a share two trading days before the buyout.

But there's more to the story from the New York Times (hat tip to Barry Ritholtz):

Holders of the more than $300 billion in Bear Stearns bonds, in the meantime, are purchasing Bear stock to strengthen their hand in voting for the deal, thus guaranteeing that their bond investments will retain the backing of JPMorgan and its guarantor, the Federal Reserve Bank of New York.

That's who is getting bailed out: Bear's creditors, clients, and counter-parties. The people whose due diligence was not very diligent. The people who could help us avoid another debacle by being very, very careful in their credit analysis.

But no, care need not be taken. If you are doing business with a large investment bank, don't worry. The Fed will bail you out if you are stupid enough to lend credit to an insolvent institution, or if you ask an insolvent institution to hold your securities, or if you pick an insolvent institution to be your counterparty in a derivatives contract.

Dr. Ben rode to the fire in a big red truck. But his truck was leaking gasoline all over town, setting up the street for another major conflagration that could be far worse than the Bear Stearns fire.

Someone should have pulled Bernanke aside and told him to chill. The economy is pretty resilient. It can withstand a lot of turmoil. Instead, the chairman is too afraid of financial turmoil, and as a result, he's going to get more of it.

Comments

[venividivici]

I think you are dead right mate!

[Malkiel]

Another Wall Street guy who doesn't get it about the Fed--the Fed is a political entity that belongs to Washington, not a financial entity that belongs to Wall Street. The Fed may be chartered as independent, but in practice they bow to the political will of Congress and the President, and the political consensus in Washington was that action was needed, so there was going to be action. You Wall Street pure-market conservatives waste your breath every time when you recommend inaction because politics is driven by calls for action from main street, and Washington can't ignore that, and the Fed ultimately can't ignore that.